The SBA misevaluated a joint venture by basing its ineligibility decision on the joint venture’s revenues, rather than determining whether each joint venturer, individually, qualified as a small business, according to a recent decision of the SBA’s Office of Hearings and Appeals.

SBA OHA’s decision highlights what I like to call the “individual size treatment rule,” a special regulation requiring the SBA to deem a joint venture “small” under certain circumstances, even when the combined sizes of the joint venture’s members exceed the applicable size standard.

SBA OHA’s decision in Size Appeal of Aerospace Engineering Spectrum, SBA No. SIZ-5469 (2013) involved an Air Force multiple-award Indefinite Delivery/Indefinite Quantity contract for engineering and related services. The contract was set-aside for small businesses under a $27 million size standard. Aerospace Engineering Spectrum, a joint venture comprised of four businesses, was one of the IDIQ awardees.

More than a year after contract award, the Contracting Officer filed a size protest, challenging AES’s small business eligibility (unlike competitors, who have five business days to file a size protest, a CO can file a size protest at any time). AES argued that it qualified as small under 13 C.F.R. 121.103(h)(3)(i). That regulation states that for certain procurements, a joint venture may submit an offer as a small business “without regard to affiliation . . . so long as each [venturer] is small under the size standard corresponding to the NAICS code assigned to the contract . . ..”

The SBA Area Office noted that the joint venture itself had received revenues in excess of the $27 million size standard. For this reason, the Area Office held that “it does not matter whether or not each joint venturer is a small business.” The SBA Area Office issued a size determination finding AES to be an ineligible large business.,

SBA OHA agreed with AES. It held that “the applicable regulation requires that, for a joint venture to be small, each member of the joint venture must be small, and the procurement must satisfy certain conditions.” SBA OHA concluded, “[i]f these criteria are met, it is not necessary that the joint venture itself also be small.”

Examining the record, SBA OHA found that it was unclear whether each of AES’s four members was individually below the $27 million size standard. SBA OHA remanded the matter to the SBA Area Office with instructions to analyze each venturer’s individual size.

At first blush, the Aerospace Engineering Spectrum decision looks like a simple matter of an SBA Area Office ignoring the individual size treatment rule for joint ventures. In my mind, though, it’s more complicated than that.

The individual size treatment rule says that a joint venture’s size is calculated “without regard to affiliation” between the members, but does not specifically address what happens when the joint venture, itself, has earned revenues in excess of the applicable size standard–which is not necessarily a question of affiliation. In this light, the SBA Area Office’s decision seems reasonable, but SBA OHA opted for a broader interpretation of the individual size treatment rule. It’s an interpretation that ought to make some joint venturers quite happy.

This is a great piece that provides clarity for many potential JV’s. I will be very interested to see if this particular case comes up again (to your point) since the JV itself had surpassed the small business size standard. Seems as though someone may have overlooked that while reviewing the “individuality” aspects of the case.

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